Rising US yields worry investors

Stocks are in the red as traders are worried about Italy’s proposed budget deficit, and the rise in US government bond yields is weighing on sentiment too.

Europe

Italy’s finance minister, Giovanni Tria, still plans to run a budget deficit of 2.4%, despite the pushback back from Brussels. The rise in borrowing costs for the Italian government is playing on traders’ minds, and there is a growing fear that we could be heading for another round of the eurozone debt crisis. The rally in US government bond yields has spooked traders as it suggests dealers are factoring in further interest rate hikes from the Federal Reserve, and that’s also adding to the bearish sentiment.

Greggs shares are in positive territory after the company revealed robust third-quarter refigures, but the growth rate was lower on the year. Sales for the period jumped by 7.3%, and that compared with 8.6% last year. Same-store-sales at company-run outlets increased by 3.2%, while the same metric saw 5% growth last year. Greggs are closing underperforming stores, but far more new stores are being opened, and the group maintained its full-year outlook. The share price has losing ground for 10 months, and while it remains below the 1,100p mark, its outlook could remain negative.

Ferrexpo shares confirmed that third-quarter production jumped by 6.2%, year-to-date production has increased by 1.3%. The push higher in the iron ore market has helped the company too. The share price has rallied since September, and if it clears the 200-day moving average at 229p, it could target the 240p mark.

US

Stocks opened lower but have recouped some of the ground lost. The 10-year government bond yield hit 3.25% - its highest level since 2011. Investors are worried the Federal Reserve will continue down their path of hiking interest rates and equities are being dropped. For nearly one week, US stocks have been losing ground, and the rise in US government bond yields has been the driving factor. Adding to that, the move higher in yields isn’t showing any signs of slowing down, so we might see further pressure on stocks.

The IMF cut is global growth forecast for this year and next year to 3.7%. The organisation cited deteriorating trading relations for the reduction. The US recently agreed a new trading arrangement with Mexico and Canada, but the trade spat with China is still ongoing, and Mr Trump might put pressure on the EU too.

FX

The US dollar continues to drive higher as investors feel the US central bank could hike rates four more times in the next 12 months. Last Friday’s jobs report was mixed, but broadly speaking the economic announcements have been positive, and that is fuelling the buying of the greenback.

EUR/USD is in the red due to the firmer US dollar. The uncertainty surrounding Italy’s proposed fiscal policy is also a factor in the euro’s weakness. Germany released impressive trade balance figures, and a decline in imports and a fractional fall in exports lead to a 15% jump in the trade surplus. The report could anger President Trump as he is keen to rebalance the trading relationship between the US and the EU.

GBP/USD fell on account of the rally in the US dollar earlier in the session, but it has since bounced back. Ben Broadbent, the deputy governor of the Bank of England announced that CPI is a better gauge of inflation than RPI. The Brexit uncertainty rumbles on things and things are still looking tricky for Theresa May as it was reported that ‘at least 40’ Conservative MPs will vote against her Chequers plan. The Troy’s are being propped by the DUP, and Arlene Foster, the leader of the party, reiterated her view that there should be no customs barrier between Norther Ireland and Great Britain. Sterling is likely to be held back until a Brexit deal is reached.

Commodities

Gold is lower again as the rise in the US dollar has hurt the metal. Gold’s inverse relationship with with the greenback continues to be strong. Today is additional proof that gold is no longer benefitting from the flight to quality play, as stocks are lower, and so is the commodity.

Oil is in demand as falling exports from Iran and the partial closure of operations in the Gulf of Mexico are pushing up prices. The US sanctions on Iran are looming and Iran’s oil exports declined further in early October. Approximately 20% of oil production in the Gulf of Mexico has been closed as Hurricane Michael draws near.

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